UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2004
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-32941
Mpower Holding Corporation
(Exact name of registrant as specified in its charter)
| DELAWARE | 52-2232143 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
175 Sully’s Trail, Suite 300
Pittsford, NY 14534
(Address of principal executive offices)
(585) 218-6550
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
YES x NO ¨
The number of shares outstanding of the issuer’s common stock,
as of May 5, 2004:
Common stock (par value $0.001 per common share) 78,423,801 shares outstanding
INDEX
| Page No. | ||||
| PART I— |
FINANCIAL INFORMATION |
|||
| Item 1. |
Condensed Consolidated Financial Statements (Unaudited) |
|||
| Consolidated Balance Sheets – as of March 31, 2004 and December 31, 2003 |
3 | |||
| Consolidated Statements of Operations – for the three months ended March 31, 2004 and 2003 |
4 | |||
| Consolidated Statements of Cash Flows – for the three months ended March 31, 2004 and 2003 |
5 | |||
| Condensed Notes to Unaudited Interim Consolidated Financial Statements |
6 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
10 | ||
| Item 3. |
17 | |||
| Item 4. |
17 | |||
| PART II— |
OTHER INFORMATION |
|||
| Item 1. |
18 | |||
| Item 5. |
18 | |||
| Item 6. |
18 | |||
| 20 | ||||
2
PART I - FINANCIAL INFORMATION
| Item 1. | Condensed Consolidated Financial Statements (Unaudited) |
MPOWER HOLDING CORPORATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
| March 31, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 29,294 | $ | 29,307 | ||||
| Restricted cash and cash equivalents |
24 | 92 | ||||||
| Accounts receivable, less allowance for doubtful accounts of $2,129 and $2,292 at March 31, 2004 and December 31, 2003, respectively |
12,196 | 14,076 | ||||||
| Other receivables |
4,031 | 5,039 | ||||||
| Prepaid expenses and other current assets |
2,959 | 4,487 | ||||||
| Total current assets |
48,504 | 53,001 | ||||||
| Property and equipment, net |
32,268 | 33,762 | ||||||
| Long-term restricted cash and cash equivalents |
9,475 | 9,537 | ||||||
| Intangibles, net of accumulated amortization of $7,636 and $6,491 at March 31, 2004 and December 31, 2003, respectively |
7,803 | 8,948 | ||||||
| Other assets |
4,063 | 3,781 | ||||||
| Total assets |
$ | 102,113 | $ | 109,029 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Current maturities of capital lease obligations |
$ | 155 | $ | 256 | ||||
| Accounts payable |
11,520 | 15,754 | ||||||
| Accrued sales tax payable |
3,578 | 3,647 | ||||||
| Accrued property taxes payable |
2,952 | 2,818 | ||||||
| Accrued bonus |
460 | 2,388 | ||||||
| Deferred revenue |
4,814 | 4,696 | ||||||
| Accrued other expenses |
10,527 | 11,018 | ||||||
| Total current liabilities |
34,006 | 40,577 | ||||||
| Long-term deferred revenue |
2,063 | 2,211 | ||||||
| Total liabilities |
36,069 | 42,788 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, 49,900,000 shares authorized but unissued at March 31, 2004 and December 31, 2003 |
— | — | ||||||
| Series A preferred stock, 100,000 shares authorized but unissued at March 31, 2004 and December 31, 2003 |
— | — | ||||||
| Common stock, $0.001 par value, 1,000,000,000 shares authorized, 78,364,507 and 78,232,742 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively |
78 | 78 | ||||||
| Additional paid-in capital |
103,801 | 103,735 | ||||||
| Accumulated deficit |
(37,835 | ) | (37,572 | ) | ||||
| Total stockholders’ equity |
66,044 | 66,241 | ||||||
| Total liabilities and stockholders’ equity |
$ | 102,113 | $ | 109,029 | ||||
See accompanying condensed notes to unaudited interim consolidated financial statements.
3
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
| Three Months Ended March 31, 2004 |
Three Months Ended March 31, 2003 |
|||||||
| Operating revenues: |
||||||||
| Telecommunication services |
$ | 37,153 | $ | 36,738 | ||||
| Operating expenses: |
||||||||
| Cost of operating revenues (exclusive of depreciation and amortization shown separately below of $1,939 and $1,946 for the three months ended March 31, 2004 and 2003, respectively) |
16,388 | 22,128 | ||||||
| Selling, general and administrative (exclusive of depreciation and amortization shown separately below of $1,962 and $2,357 for the three months ended March 31, 2004 and 2003, respectively) |
17,549 | 21,128 | ||||||
| Stock-based compensation expense |
39 | 62 | ||||||
| (Gain) loss on sale of assets, net |
(198 | ) | 95 | |||||
| Depreciation and amortization |
3,901 | 4,303 | ||||||
| 37,679 | 47,716 | |||||||
| Loss from continuing operations |
(526 | ) | (10,978 | ) | ||||
| Other income (expense): |
||||||||
| Loss on discharge of debt |
— | (102 | ) | |||||
| Interest income |
88 | 50 | ||||||
| Interest expense |
(66 | ) | (139 | ) | ||||
| Loss before discontinued operations |
(504 | ) | (11,169 | ) | ||||
| Discontinued operations: |
||||||||
| Income (loss) from discontinued operations |
241 | (3,981 | ) | |||||
| Net loss |
$ | (263 | ) | $ | (15,150 | ) | ||
| Basic and diluted (loss) income per common share: |
||||||||
| Loss before discontinued operations |
$ | (0.01 | ) | $ | (0.17 | ) | ||
| Income (loss) from discontinued operations |
$ | 0.01 | $ | (0.06 | ) | |||
| Net loss |
$ | — | $ | (0.23 | ) | |||
| Basic and diluted weighted average common shares outstanding |
78,321,851 | 64,999,025 | ||||||
See accompanying condensed notes to unaudited interim consolidated financial statements.
4
MPOWER HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
| Three Months Ended March 31, 2004 |
Three Months Ended March 31, 2003 |
|||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (263 | ) | $ | (15,150 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and amortization |
3,901 | 4,303 | ||||||
| Bad debt expense |
457 | 2,858 | ||||||
| (Gain) loss on sale of assets, net |
(198 | ) | 95 | |||||
| Loss on discharge of debt |
— | 102 | ||||||
| (Gain) loss on disposal of assets from discontinued operations |
(50 | ) | 1,117 | |||||
| Amortization of deferred debt financing costs |
— | 33 | ||||||
| Stock-based compensation expense |
39 | 62 | ||||||
| Changes in assets and liabilities: |
||||||||
| Decrease (increase) in accounts receivable |
1,423 | (9,886 | ) | |||||
| Decrease in other receivables |
1,008 | — | ||||||
| Decrease in prepaid expenses and other current assets |
1,528 | 1,695 | ||||||
| (Increase) decrease in other assets |
(64 | ) | 6,065 | |||||
| (Decrease) increase in accounts payable |
(4,596 | ) | 6,160 | |||||
| (Decrease) increase in accrued sales tax payable |
(69 | ) | 622 | |||||
| Decrease in accrued other expenses |
(2,505 | ) | (2,120 | ) | ||||
| Net cash provided by (used in) operating activities |
611 | (4,044 | ) | |||||
| Cash flows from investing activities: |
||||||||
| Purchase of property and equipment, net of payables |
(667 | ) | (1,928 | ) | ||||
| Proceeds from asset sales |
205 | 4,144 | ||||||
| Sale of restricted investments |
130 | 2,898 | ||||||
| Net cash (used in) provided by investing activities |
(332 | ) | 5,114 | |||||
| Cash flows from financing activities: |
||||||||
| Payments on capital lease obligations |
(101 | ) | (1,078 | ) | ||||
| Repurchase of senior notes |
— | (2,154 | ) | |||||
| Borrowings under line of credit, net |
— | 3,918 | ||||||
| Costs associated with line of credit |
— | (131 | ) | |||||
| Costs associated with shelf registration |
(218 | ) | — | |||||
| Proceeds from issuance of common stock |
27 | — | ||||||
| Net cash (used in) provided by financing activities |
(292 | ) | 555 | |||||
| Net (decrease) increase in cash and cash equivalents |
(13 | ) | 1,625 | |||||
| Cash and cash equivalents at beginning of period |
29,307 | 10,773 | ||||||
| Cash and cash equivalents at end of period |
$ | 29,294 | $ | 12,398 | ||||
| Other Disclosures: |
||||||||
| Cash paid for interest |
$ | 33 | $ | 208 | ||||
See accompanying condensed notes to unaudited interim consolidated financial statements.
5
MPOWER HOLDING CORPORATION
CONDENSED NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Mpower Holding Corporation (the “Company”), a Delaware corporation, include the accounts of the Company and its wholly-owned subsidiary, Mpower Communications Corp. (“Communications”) and other subsidiaries of Communications. All inter-company balances and transactions have been eliminated.
The Company was one of the first competitive local telephone companies founded after the inception of the Telecommunications Act of 1996, which opened up the local telephone market to competition. The Company offers local and long distance voice services as well as high-speed Internet access by way of a variety of broadband product and service offerings. The Company’s services are offered primarily to small and medium-sized business customers and residential customers (primarily in the Las Vegas market) through Communications in Los Angeles, California, San Diego, California, Northern California (the San Francisco Bay area and Sacramento), Las Vegas, Nevada and Chicago, Illinois. As of March 31, 2004, the Company had approximately 51,000 business customers and approximately 21,000 residential customers. The Company also bills a number of major local and long distance carriers for the costs of originating and terminating traffic on the Company’s network for the Company’s local service customers. The Company does not have any unbundled network element platform (“UNE-P”) revenues.
The Company operates its business as one segment. The Company manages its business as a consolidated entity managed at a national level. The Company’s products and services have similar network operations, back-office support and technology requirements and are sold through similar sales channels to a similar targeted customer base. Therefore, the Company manages these services as a single segment that are sold in geographic areas, or markets, within the United States, or that are sold to customers with a presence across geographical markets.
These condensed consolidated financial statements reflect all normal recurring adjustments, which management believes are necessary to present fairly the financial position, results of operations, and cash flows for the Company for the respective periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission.
The consolidated balance sheet at December 31, 2003 was derived from the audited consolidated financial statements of the Company.
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for other interim periods or for the year ending December 31, 2004.
Certain reclassifications, which have no effect on net income, have been made in the prior period financial statements to conform to the current presentation.
(2) STOCK OPTION PLAN
The Company measures the compensation cost of its stock option plan under the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as permitted under Statement of Financial
6
Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Under the provisions of APB No. 25, compensation cost is measured based on the intrinsic value of the equity instrument awarded. Under the provisions of SFAS No. 123, compensation cost is measured based on the fair value of the equity instrument awarded.
Had compensation cost for the employee stock options been determined consistent with SFAS No. 123, the Company’s results from operations would approximate the following pro forma amounts for the three months ended March 31, 2004 and 2003 (in thousands, except per common share amounts):
| March 31, 2004 |
March 31, 2003 |
|||||||
| Net loss, as reported |
$ | (263 | ) | $ | (15,150 | ) | ||
| Add: Stock-based compensation expense included in reported net loss, net of related tax effects |
39 | 62 | ||||||
| Deduct: Total stock-based employee compensation expense to be determined under a fair value based method for all awards, net of related tax effects |
(761 | ) | (270 | ) | ||||
| Pro forma net loss |
$ | (985 | ) | $ | (15,358 | ) | ||